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Top Economists Predict ‘Structural Inflation’: 3 Reasons Why They Don’t See Problem As Temporary

Top Economists Predict ‘Structural Inflation’: 3 Reasons Why They Don’t See Problem As Temporary

structural inflation

Credit: iStock / shironosov, https://www.istockphoto.com/portfolio/shironosov?mediatype=photography

Federal Reserve Chairman Jerome Powell, who repeatedly downplayed the risk of inflation in 2021, finally retired the word “transitory” to describe the inflationary outlook, acknowledging to Congress on Nov. 30 the growing risk of more persistent inflation.

Whether inflation is transitory or structural depends on who you ask.

Structural inflation is defined by CEOpedia as inflation that results from changes in the structure of demand and supply. Due to changes in the structure of demand and supply, some branches of businesses will experience increased demand for their products, while others will see lower demand. Structural inflation arises when producers cannot adapt their production structure efficiently in response to changes in the structure of the economy. These changes may involve demand for the product, a company’s production technology and competition.

Here are three reasons why inflation is being seen as structural, not transitory.

Deglobalization and economic war

The dramatic expansion of international trade in the three decades since the end of the Cold War benefitted the global economy and helped keep price increases in check. That trend has recently started to reverse, wrote Timothy Foster, a portfolio manager at investment manager Fidelity International, with co-writer Libby McNie, a fixed income graduate.

Levels of global imports and exports have declined between the U.S., China, and other major trading partners since the 2008 financial crisis, exacerbated by the covid-19 pandemic. Companies and governments have been forced to reflect on their regional dependencies as pressure increased on global supply chains. Vladimir Putin’s Feb. 24 invasion of Ukraine and sanctions against Russia are expected to accelerate deglobalization.


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.A global economic war is undermining deflationary relationships that kept prices low in recent decades, according to Zoltan Pozsar, global head of short-term interest-rate strategy at Credit Suisse in New York. In the past, Russia and China supplied cheap goods and services to more developed countries such as the U.S., Pozsar wrote in a client note. With East-West relationships now rocky, “supply snapped back,” he added.

“War is inflationary,” Pozsar wrote. “Think of the economic war as a fight between the consumer-driven West, where the level of demand has been maximized, and the production-driven East, where the level of supply has been maximized to serve the needs of the West.”

As a result, inflation is now a structural problem, rather than cyclical. Supply disruptions have arisen from changes in Russia and China, along with tighter labor markets due to immigration restrictions and reduced mobility caused by the covid-19 pandemic, Pozsar said.

Shifting demographics and structural inflation

Shifting demographics is another structural change that’s expected to keep inflation higher for longer. 

The World Health Organisation projects that between 2015 and 2050, the proportion of the world’s population over the age of 60 will almost double from 12 percent to 22 percent.

“We believe that aging populations will raise demand for goods and services to levels that a shrinking working-age population will struggle to meet, piling upward pressure on prices,” wrote Foster and McNie. 

Greenflation

“Greenflation” — the shift to a greener economy — will involve significant investment in renewable energy and decarbonization technologies, potentially ushering in carbon taxes. This will impact medium-term inflation. The consumer price index in Germany, for example, was boosted by approximately 0.6 percent in 2021 after the introduction of a carbon tax on heating and transportation. Deutsche Bank anticipates that European Union climate policy could add 0.35 percent to Eurozone inflation per year.

The U.S. has been debating carbon taxes for decades but that hasn’t happened yet. Potentially transformational climate change legislation is making progress in the U.S. as part of the Inflation Reduction Act — an agreement to tackle climate change, taxes, health care and inflation, with $369.75 billion set aside for energy security and climate change programs over the next 10 years. Senate Democrats claim the legislation will reduce carbon emissions by 40 percent by 2030.

Sherry Paul, senior portfolio manager at Morgan Stanley Private Wealth Management, discussed on Bloomberg TV how she’s advising clients to take advantage of structural inflation.

“Plan for inflation being structural and own sectors of the market that actually benefit from the reflationary stories,” Paul said during a July 19 interview. “So that would put you in financial and energy stocks, and at the same time, one defensive area of the market that also speaks to ongoing trends that nobody is talking about, like an aging population. That would put you back in healthcare and even all the biotech innovation around vaccines and therapeutics.”